The economy shrank 0.1 percent in July-September from the
previous three months, a third consecutive quarterly decline,
according to the median estimate of seven economists in a
Bloomberg survey. Gross domestic product shrank 1.3 percent from
a year earlier, a poll of 19 analysts showed. The statistics
office will report the data at 9 a.m. in Budapest today.

Hungary is in its second recession in four years as trade
and banking links with the slumping euro area drag down growth.
Foreign lenders forced to pay Europe’s largest bank levy are
withdrawing capital and funding, restricting credit. Measures to
cut the budget deficit to avoid a freeze of European Union
development funds are hurting business and consumer confidence.

“It’s weakness in the domestic economy combined with a
difficult external environment and the government has been busy
trying to trim back the budget deficit,” Nigel Rendell, an
analyst at Medley Global Advisors in London, said by phone
yesterday. “It’s really hard to find any areas of growth in
Hungary.”

The forint traded at 285.07 per euro at 5:50 p.m. in
Budapest yesterday. It has gained 10.4 percent against the euro
this year, the world’s best performance, as Hungary has
benefited from stimulus by the U.S. Federal Reserve and the
European Central Bank, investors’ hunt for higher-yielding
assets amid record-low rates in the developed world and
speculation that the government is nearing a loan accord with
the International Monetary Fund.

IMF Talks

Hungary requested aid a year ago as its credit rating was
cut to junk. Talks for a loan of about 15 billion euros ($19
billion) were delayed multiple times because of the Cabinet’s
resistance to legal and economic conditions set by the IMF and
the EU.

Hungary’s 100 billion-euro economy is the fourth-largest
among the EU’s eastern members after Poland, the Czech Republic
and Romania, according to Eurostat figures.

The Czech statistics office may say today that the economy
contracted 0.2 percent in the third quarter from the previous
three months, Romania may say that its GDP was unchanged in the
quarter, while Poland on Nov. 30 may report 0.2 percent
expansion from the previous quarter, according to separate
surveys of economists.

Eastern European credit growth has stalled because of the
euro region’s recession and a withdrawal of funding by the
western lenders that dominate the market, with Hungary being one
of the worst affected, the Vienna Initiative group of
international lenders and regulators said Nov. 12.

CDS, Bonds

The cost to insure Hungarian government debt against non-payment with five-year credit-default swaps was 289 basis points
yesterday, falling from as high as 735 points Jan. 5, data
compiled by Bloomberg show. The yield on the benchmark 10-year
forint-denominated government bond was 6.88 percent yesterday,
down from 9.9 percent at the end of last year.

The central bank on Oct. 30 reduced the two-week deposit
rate for a third month by a quarter-point to 6.25 percent as
policy makers grew more concerned about the recession than
inflation. There’s still room to cut the EU’s highest borrowing
costs as Hungary’s risk assessment improves and the inflation
goal remains within reach on the policy horizon, central bankers
Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said
Nov. 5.

Rate Outlook

Bartfai-Mager, Gerhardt and Kocziszky were among the four
non-executive Monetary Council members who outvoted Magyar
Nemzeti Bank President Andras Simor and his two deputies to cut
rates the past three months, according to the central bank.

Credit to households shrank 14 percent this year from last
and loans to companies are down 6 percent, Morgan Stanley said
in an Oct. 26 report citing its own and the central bank’s
calculations.

“Hungary has seen the sharpest contraction in credit in
central and eastern Europe,” Pasquale Diana and Jaroslaw
Strzalkowski, London-based economists at Morgan Stanley, wrote
in the report. It’s “a clear sign that not only is the credit
channel not working, but banks are also continuing to retrench
aggressively.”

Hungary’s economy will expand 0.3 percent next year and 1.3
percent in 2014 after contracting 1.2 percent this year,
according to the EU’s Brussels-based executive.

GDP Outlook

The government last month cut its GDP forecast to a
contraction of 1.2 percent this year from 0.1 percent growth and
predicts an expansion of 0.9 percent in 2013. Growth may reach
1.4 percent in 2013 as investments by companies such as Daimler
AG and Volkswagen AG yield results, Economy Minister Gyorgy
Matolcsy said last week.

In its latest spate of austerity measures, the government
backtracked on a pledge to cut the EU’s highest bank tax in half
and said it will increase a planned tax on bank transactions,
introduce a levy on utility companies’ infrastructure, reduce
local-business benefits and raise taxes on employee benefits.

“The economy is characterized by weak potential growth,
partly caused by policy uncertainty and increasingly
distortionary taxes, most notably very high extra burdens on the
financial sector,” the European Commission said in a Nov. 7
report.